Funding Your Childs Post Secondary Education

A recent article by the Globe and Mail regarding the increasing cost of Post Secondary tuition hit close to home. In the article, it is projected that a child born today going to University 18 years from now would face a cost of over $100,000 for a typical 4 year program. To add salt to the wound, the $100,000 is for a child who lives at home – it could cost over $130,000 for the students who move away.

As Baby FT was born in 2008, I assume the projections for the cost of University will be fairly close to what the article states. As we started an RESP in 2008, will it be enough to fund Post Secondary Education?

We decided to use the RESP program which allows up to 20% of your (after tax) deposit annually will be matched by the government, up to $500 per year. So to max out the government grant, $2500 would need to be deposited annually. Investments can grow tax free within the account, but withdrawals will be taxed in the hands of the student which shouldn’t be a problem as they typically make very little income at that stage.

With regards to the RESP investment strategy, we decided to with the TD e-series to index the portfolio over the next 17 years or so. The plan is to gradually reduce our equities exposure as the withdrawal period closes in. We deposit $2500 lump sum annually with the government depositing $500. This results in $3000 in new cash every year to invest with.

My assumption is that the portfolio will grow 5% annually after inflation which, after 17 years of growth, will result in a portfolio size of approximately $88,000. This is not too far off the $100k required IF our child decides to live at home during University years. If moving away is the plan, then I the difference will have to be made up somewhere. Whether it’s student part time work, student loans, or if Daddy needs to open up his wallet once again – a plan needs to be put in place.

The issue of who should pay for post secondary education is a well publicized. Some believe that post secondary education should be the child’s responsibility while others feel the bill should be covered by the parents. I’m in between the two camps. I managed to pay my way through school without student loans by working part time, choosing a degree that had paid work terms, staying at home and living frugally. However, even that (and RESP money) may not be enough in the future with rising tuition and living expenses.

My initial thoughts (which may change over the years) are that we’ll cover all education expenses, but baby FT will be responsible for living expenses. The amount that baby FT will have to come up with will depend whether or not they want to live at home. If the kid(s) decide to live away from home, then they’ll most likely need to fund their living expenses on their own (or a portion of) though part time work, loans (eligible if using RESP?), or scholarships.

Who knows, if we can ingrain a good savings habit in them early, then perhaps they’ll have some cash to cushion the blow.

What are your thoughts on the rising cost of tuition?

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About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

Given the inflationary norms of our economy, future costs always look scary today. I think the increasing cost of post-secondary education is being overstated to build business for banks and education savings programs. I just compared my final year of fees (1997, Ontario, Canada) to today’s costs for the same program, residence room, and food plan. I left out books because I just don’t know how much today’s text books cost.

In 1997, I paid $2,400 for full-time tuition, $2,600 for a single residence room, and $2,000 for an on-campus meal-plan.

Today, at the same school, tuition is $3,710, the residence room is $5,625, and the meal-plan is $2,575.

So, in 1997, the total was $7000, today it would be $11,910. Yes, an increase. An increase in the dollar value from $7,000 to $11,910 over 12 years is an annual rate of 4.5%. Project that another 18 years and the cost will be about $26,000 / year. So, I’d say it will cost $100,000 for 4 years of live-away schooling, not stay at home school.

To keep the comparison fair, however, the basic minimum wage should be considered. In Ontario, Canada, in 1997 it was $6.85 and is $9.50 today, going to $10.25 next year. So, in 1997 it took 1021 hours of minimum wage employment to fund the whole year, today it takes about 1250 hours. An increase of work hours from 1021 to 1250 isn’t negligible, but as an annual increase it’s 1.7%.

So, yes, the cost is rising, but not drastically so. On a dollar basis, it’s rising about 4.5% per year; on an hours-of-work basis, it’s rising less than 2% per year. It’s still possible to pay for a year’s tuition with under 400 hours of minimum wage work, only 32 hours a week for the whole 12 week summer term will cover a year of tuition.

Looking at the components, tuition increased 54% (3.7% annual), the room increased 116% (6.7% annual), and food increased 29% (2.1% annual). Food has followed inflation, tuition has doubled it, and the room has more than tripled the normal inflation rate.

Public transit fees should be added to any budgetary calculation for the stay at home cost. Local transit tickets (TTC) cost $1.60 in 1997 and are $2.25 today. Assuming 12 trips a week for 40 weeks, transit cost $768 in 1997 and $1,080 today. The annual increase of ticket cost is 2.8%, slightly above average inflation. Student tickets today cost $1.50, project that 18 years and they will probably cost about $2.50/ticket, or $1,200 for a years supply of student tickets.

All in all, is increasing education costs a concern? For me, no, but I’m fortunate and well-employed. I’m able to take advantage of the 20% free money from the government which most than offsets the increases I’ve seen. However, I do realize that for many, saving $2,500 a year is very hard (if not impossible). One must wonder why our government keeps giving away money to the people who need it the least while not helping the people who will actually have trouble paying for future education? Consider the current Home Reno credit, Child Fitness credits, and the RESP grants. I think that’s the real question to ask.

What I would like is to get current day costs from an unbiased source (ie nobody connected to the media or financial industry) who knows what they are talking about (ie a student or parent or a student who is in school now) to get some accurate costs. I’ll do my own projections from that.

Your tution amount for today is a bargain in Toronto. It cost 5-6 thousand for tution 7grand for residence here. So, depending on where you’re the tution cost could be as high as the article state.

Also keep in mind the goverment’s attitude toward subsidizing tution cost is tending toward reducing the susidy, which means the universities have to increase the fee to fill the gap (I’m not against that government’s policy though).

Look who published the study: “TD Financial”. The numbers are purposely inflated to “scare” people into purchasing investment products. This is not unlike the “you need 70% of your income to retire” marketing campaign.

Don’t get me wrong. RESPs are great vehicles for saving for your child’s future. But don’t be conned into thinking that you’ll need a 4 figure account 18 years from now to get a post secondary education.

I think we can all agree that the numbers put out that predict the costs of post-secondary (let’s assume university since it should cost more than college) are not going to be affordable by most Canadians.

Keep in mind the university is essentially a business and while it will keep increasing prices as long as the market will bear, it can’t increase beyond what the market will bear. Universities also have fearsome competition among each other for certain programs.

However one disturbing trend is costs ARE rising and this is making it harder for low-income individuals to go to university or atleast graduate with more debt. I went through engineering so I’ll use that as an example. (Also engineering programs are never eligible for tuition freezes like arts or humanities so it makes a good comparison).

When my boss went through engineering (20 years ago) , tuition was about $2000 per year, an amount that could be saved by working full-time hours at a summer job for a little above minimum wage and still be able to pay for books, food, shelter. Most grads had no debt (if they live frugally).

When I went through engineering at the same school as my boss (10 years ago) tuition was about $5500 per year. Once again, working full-time hours or close to for a little above minimum wage could just cover the tuition, but that’s it. THe rest of the books and living expenses ($5K to $8K) had to come from OSAP. But sensible living meant OSAP and summer job had me covered. I just had to pay down that OSAP after school. The increase of tuition over the previous ten years was about 10% per year.

My understanding now is that engineering at my local university is about $7300 per year (checked their fee table). Given the four month summer, a typical student cannot take home $1825 per month. OSAP I don’t think supplies more than $10K in funding. So even with OSAP, the student will need extra loans or bursaries for a few thousand dollars to cover all expenses.

Notice that in the 10 years prior to my enrollment, tuition for the program more than doubled. However in the past 10 years since I began school, tuition has increased only 33%. An increase of roughly 3% per year.

I think we can already see the limiting factor at work here. Tuition cannot increase above inflation indefinitely, that would cause it to grow beyond what anybody can afford far to quickly. It’s already slowed down to just above inflation.

If you feel more aggressive, you can consider something like 20% Canada, 15% US, 15% EAFE, and 50% Emerging Markets. Again, SMA200 is a must under such conditions. Your RESP returns may increase to 10% – 15% per annum.

If you are considering using SMA200, you can phase out your growth period in a later stage due to the ability of avoiding market corrections. This should help with returns as well.

I think that if you can manage to put away the $2500 per year, add the goverment’s contribution of $500 per year, and that will almost cover everything for your child’s first university degree. For anything on top of this amount, they should be encouraged to save their own money. I think it’s a nice compromise that post secondary education is funded through the efforts of the parent, the child and government. Kids try harder in school knowing that their dollars are helping to pay for it.

I don’t think tuition costs rising are a surprise to anyone – I remember my mom being shocked at how much more it was when we went to university than when she went. Not that she paid for it ;-).

For me, university cost just enough to be able to afford it living very frugally, but also enough that I didn’t want to squander the money by doing poorly grade-wise.

Steve:
“My understanding now is that engineering at my local university is about $7300 per year (checked their fee table). Given the four month summer, a typical student cannot take home $1825 per month. OSAP I don’t think supplies more than $10K in funding. So even with OSAP, the student will need extra loans or bursaries for a few thousand dollars to cover all expenses.”

In the engineering co-op program, students can easily take home $1825 per month. I have the co-op engineering salary survey right in front of me for the U of Alberta. The lowest monthly salary is $2300 and the highest is $5K. Yes, that’s right, 60K a year to be a co-op student. The average is about $3,700 a month.

I question the study’s assertion of the living expenses of a university student living at home. I can only surmise that the child owns a car, pays for all of their clothes, food and entertainment.

Frankly, that to me is not the cost of education – that is the cost of living and should not be included in the discussion. If the child instead decided to stay at home but get a full time job, we wouldn’t lump that in with the cost of working. Also – why is the growth rate of living expenses growing at such a high rate of 3.5% when at home (or even 2.9% when away from home)?

Once you eliminate the living expenses, it doesn’t look so scary.

Good observation on who funded the study – no potential hidden agenda there, right?

Just to point out, not every province has done so well on minimum wage. In BC, it was $7 in 1997, the highest nationwide. Today? A paltry $8, the lowest nationwide. Moreover, when the $8 minimum wage was introduced in 2001, the BC government added a “training wage” of $6 for people who have done less than 500 hours of paid work. So minimum wage for young people has actually gone DOWN in BC in nominal dollars, and *way* down in real dollars.

I am 24yrs old graduated from university 2 yrs ago and have developed a solution where the parent and child benefit. I call it “reimbursement/reward”. I currently use a version of it with my little brother ~20yrs. Ideal solution for you: have the child save up enough cash for the first semester/term of university, if they pass and do well, just reimburse some or all of their costs. If they fail they don’t get anything from you. After the first semester/term you have given them a number of things: money (towards the next semester), a desire not to loose thousands of dollars by failing and learnings about money. This teaches them about money before they go to university because they have to save before they get to university (best to start young). This also keeps them focused on studying, while not wasting time and money by failing. Also by not giving them money up front they have the desire to work hard through university and also to please you.

Many of my peers that had money blatantly given to them for education or otherwise had never learned how to take care of themselves without their parents help. I bet you want them to be self sufficient and leave home before their 40’s. Stop making them meals of any type, this is so much of a luxury that personal chefs cost a lot of money. Stop making them food and they will leave. I started working in my field of education 6 days after graduating, and moved out right after getting a full time job.

For me, tuition was ~$5500 a year and books were ~$1000 a year being $30,000 for a 4 year term at university. I worked weekends during the school year and more than full time during the summers. I had enough cash on hand to pay tuition when it was due, i graduated with a bunch of money left over with the help of scholarships and parents rewarding. I actually paid some of my parents house expenses, clothing, entertainment, insurance on 2 vehicles, and bought a vehicle (with cash) while I was in university.

My brother is in university and ~20yrs old, he had a hard time the first year but realy turned it around after that. He was doing fine for cash on his own, but one time he asked me for some money for a course, I gave it to him right away and told him it was a reward for his recent successes in university and I would be willing to reimburse him 50% of his tuition if he continues. Why not help my little brother with his education? He said he didn’t need the 50% reimbursement from me and after a month or so called me and said next time I see him that he has the cash I gave him. Because he is my brother and he has shown discipline and successes I would hot hesitate to help him with something else if he asked or I saw he needed it. He won’t take my money so I am forced to buy him cool things he would not buy for himself, typically things we can do together.

What to keep in mind:
The child should be able to receive scholarships, they are smart, right?
The child should work during the summers. If not, they are taking summer classes. Period.
There are jobs they can do while in university that requires they only work weekends.
This solution can end up with the child receiving all the cash they ever put up for tuition and not spending an unusually long amount of time and money at university.
Also tell them when they are done university they will have to move out so that they have a reason to get a degree that is useful not laughable.
If your child starts failing you will have to get on their case, if they keep failing you will have to figure out what to do.
You can choose what grades for reimbursement/reward are acceptable for you.
You can choose the % of reimbursement/reward that is acceptable for you also.

A bit irrelevant but still… For people not banking with td, what would be the alternative to implement your RESP strategy? E-series funds are not traded outside of td bank but I like them (like everybody else) for low mer, no load and low minimum deposit. Any recommendations?

Kate, before I started with the td e-series, I did not bank with TD. Although my td rep told me differently, you CAN simply open a td e-series/mutual funds account and fund the account via your regular bank (EFT).

My son is 22 and recently started on his Masters degree. We had set aside roughly 20k per child (we have 2) in a trust account with the idea being that that should be sufficient funds to cover a bachelors degree while they lived at home. (Neither my husband nor myself had any financial help from our parents so started out our married lives with student loan debt–we hoped our kids would be able to avoid that.)

My son worked full time during the summers and did some marking/lab demo work for the university during the school year. He also received some scholarships and academic awards, but regardless, he did not touch the money we had set aside for him. He worked, paid his way through school (about $4500/year in Manitoba) and used a bus pass. When he turned 21 last year and it became obvious he was indeed going to finish his degree, we signed the trust account over to him for him to use as he chooses.

We chose NOT to use RESPs because of the lack of flexibility in how and when the money is spent–perhaps someone who is currently using them can talk to whether that is a justifiable concern.

I don’t see why the parents should pay. At 18-22 the child is already an adult. The child should borrow the money (and/or work part-time).

However, I think that education costs should be picked up by the government. Admission to college/university should be based exclusively on merit. The government will recover the costs in taxes later on.

We should attract top scientists to our Universities and that will cost much more than what we are paying the teachers right now. So I hope the costs for higher education will increase substantially in the future.

Though we certainly planned to encourage our kids to pursue post-secondary education, we figured there was a real chance they might opt for another path and so we went the trust account route….everyone needs to make that choice for themselves I guess.

That sounds like a great plan to fund your child’s post secondary education. With education costs so high, many young people will simply skip post secondary education. It is either that, or go into debt that will take many years to repay.

I was lucky enough to have my mom cover most of the costs of my 2 year post secondary degree. I don’t know what I would have done if she was not able to pay that. I might’ve settled for a much different route if I had to pay for it all myself. Of course not everyone will be able to pay for their child’s schooling. If you can pay for it though, it sets them up for a much easier start to their professional life. Instead of paying off a debt for 10+ years, they can start saving for important things like an apartment or vehicle.

FrugalTrader: Kate, before I started with the td e-series, I did not bank with TD. Although my td rep told me differently, you CAN simply open a td e-series/mutual funds account and fund the account via your regular bank (EFT).
Thanks for your reply. The problem is I already have RESP with Royal Bank with some money there. Next year I am going to contribute every month but contemplating on which index funds to choose…

Index funds generally range around 1% MER. A fair bit higher than the td e-series or ETF’s, but still much cheaper than the typical active management mutual fund. If your looking for ideas, check out my RESP strategy. I’m sure that RBC has a Canadian, US, international and bond index available for their RESP.

I am not sure what to say about the rising cost of tuition, right now I am a student but for me… it is what it is… and either way if I want higher education I have to pay. From what I know though.. the cost of tuition could be even higher if it wasn’t for the aid of the government aiding state colleges as far as the USA universities are concerned.

– Children worked and paid up front for all tuition.
– If final marks are over 75% (per course) my friend reimbursed the tuition costs for that course.
– Room/Meal plan costs were divided.

Kids breezed through but also learned the value of money and responsibility. My friend’s theory was that he was not going to pay if his kid’s weren’t taking it seriously (i.e. “Party Time at U of ________”).

I’m planning to trying something very similar. While I have been contributing to the RESP, I’m not going to go crazy either.

My parents saved for my post-secondary education but I was expected to work part-time through high school and contribute, as well. They paid my rent and I paid my tuition, books, and was responsible for my spending money and food. I did not live at home and was glad for the experience of both residence and living with others (challenging!). I know that if I had run out of money, they would have contributed more but I had saved well and that never occurred. In fact, they didn’t use all of the money they saved for my undergrad degree and were able to help out a bit with my Master’s.
My husband and I now have an RESP for our young toddler and will do the same as my parents did – we are fortunate enough to do so and really appreciate that. My husband graduated college with a fair amount of debt (his parents didn’t save and he had to work on their farm, for which he didn’t get paid, hence didn’t save much either) and doesn’t want our child to have the same situation.
On another note: I had several friends who chose college over university due to a more rapid route to a job (ie. less time in school) and due to a lack of savings. They’re now trying to go back to university while raising families.
I guess my conclusion is that we’re saving so that our child has options and so that we’re not having to pinch pennies ourselves when he goes away to school. At the same time, we will encourage him to save and learn the value of money, as well. I have a sense of satisfaction from paying as much as I did for my education and hope to encourage that in him, as well.

In my opinion, it is a great idea to give your child some tuition money for college especially if they receive no financial help from the government. However, it is up to him to find a part time job while he is attending college to help pay for other extra necessities. Something that definitely helps though is scholarships. Applying for small scholarships accumulate and in the end it really does add up to a lot.

The 20% government grant, coupled with years of tax-free growth, makes the RESP a compelling investment for families who can afford it. We maximize the RESP grant ($500 for $2500 contributions a year each) for both our children and plan on doing so until we max out on the government grants about 14 years from now, unless the rules change. We already know there is an extremely high likelihood that the children will pursue postsecondary education. However, I do believe that parents should prioritize their RRSPs and TFSAs before committing money to the RESP. There will be a time to help children through school, but it shouldn’t be at the expense of your own savings and retirement. RRSP first, TFSA second, RESP third, non-registered savings fourth.

No offense, but any vehicle that lets you save money without being taxed on the return is beneficial. Is it the end all to all investments? No, but a good one.

Just to clarify, as of today, you get 20% from the Gov’t of Canada, to a max of $500 a year, to a max of $7200 lifetime. Depending on your income, you can also qualify for the Bond and the Grant. Certain provinces also have programes. Alberta has a program where if you are born in the province, after 2005, you get a $500 grant. then $100 at the age of 8, 11 and 14, if you live in Alberta.

There are three portions to a RESP. EAP (Educational Assistance Program, These amounts include the RESP’s accumulated income, Canada Education Savings Grant (CESG), and income on the grant.) There are rules for this withdrawal and it is taxed in the childs hands. check before doing a withdrawal.

AIP (Accumulated Income Payments, is any distribution from a registered education savings plan (RESP), excluding a refund of payments, repayment of a Canada Education Savings Grant (CESG), an educational assistance payment (EAP), a payment to an educational institution, or a transfer to another RESP.)

And last, the capital (your money).

I could tell you all of it, but honestly, rules change. For example, you can keep the RESP until your child turns 31. Used to be 25.

As for when to close, you have a lot of options as today. Child takes it, you take your money back, you can even donate it…. All withdrawals have a set of rules and taxes. Check before you want to do it.

As for the investments, you can put almost anything. Just remember, when they turn 15, start transferring into income and/or savings vehicles.

Just so you all know, I work for one of the five banks and I have made a lot of withdrawals in the last few months. The amount of bad information, bad investments, etc is no laughing matter. My preference is an Income vehicle with exposure to the market. Regular contributions, passive income and time, will cover all bases.

Lots to think about here. I think I’m convinced that participating in an RESP is the best way to go. I have a 2 year old son & another on the way and since i was wary of the RESP in the past, i never started any education savings for him. Now, I am realizing that I am probably making the worst decision out there – doing nothing. I need to start and I intend to start now. I have $2,500 that I am going to make sure to get into an RESP by December 31st, 2009 to get the grant for the current year and I am wondering one thing:

Should I invest in RBC Index Funds (MER = 0.68%) or the RBC Target 2025 Education Fund (MER = 1.95%)? It’s still very early in the investment lifetime and I think I will become more & more involved in my investments over time – as they grow.

FT, I have a solution for you if your child decides to leave home to go to school. Co-sign on the purchase of a 4 or 5 bedroom house and have your child live there rent free, provided that they act as the “land-lord”, find roommates to cover the mortgage and utilities, shovel the walk, mow the lawn, etc.

My parents did this for me when I moved about 200 KM away to go to University. It was a great way for me to learn how to manage the household, juggle the bill payments, learn people skills (one bad roommate is all it takes for you to figure that out). I probably had 15 roommates over the course of 5 years, and at the end we sold the house for a tidy profit. I believe there were also some tax advantages for my parents, with the house being a rental property.

The summer prior to school starting, my parents and I drove down to the University town and hunted for a good quality house that would suit our needs (5 bedroom, within a 15-20 minute walk from campus). Renting it out was never a problem, as there are always needy students looking for a place to rent for $300 – $500/month. We kept a joint account for all of the household bills and mortgage to go through (so they could keep tabs on me I’m sure), but I honestly never ran into any issues and for the most part had a great experience managing the house.

The reason you co-sign rather than just buying it as a rental property is that it establishes some credit for your child as well as developing pride of ownership and sense of accomplishment (looks pretty impressive to be a 19 yr old home owner).

FT, to be honest…not a chance! I much prefer the stock market to the PITA factor involved in real estate investing (and I’m not a handy man at all). It was fine for me at the time because I lived there. If I purchased a rental now, I would need to find another “me” to be the landlord and look after the things that I looked after (finding roommates, small maintenance, etc). Maybe you could find someone like that by offering them a discount on their own rent in exchange for managing the property for you. I’m not really interested at this point in my life.

We’re probably in pretty similar situations (I just turned 30, we had our first child last May), and here in Southern AB the housing market took off about 4 years ago and has stayed pretty high during the recession. We bought the 5 bedroom house in 1998 for $105k and sold it for $126k in 2003. Bought a new 2 bedroom house later in the year (as I still needed a place to live) for $129k which is now valued at $249k. The same bargains aren’t out there for 5 bedroom houses ($350k+) or 3 bedroom condo’s ($220k+), it feels to me like I would be buying at the height of the market without any real upside.

Like I said, for now I like the stock market…Dogs of the TSX strategy for the RRSP’s and Income Trusts for the TFSA’s.

The example I gave you is more of a life/learning investment for your child, and then you can sell after they graduate…or keep the house in some capacity if it they like the arrangement. 5 year investment, pretty low risk…could even generate good cash-flow for you and/or your child.

JFG:
The problem is not bad information, it is the lack of it….You probably have a higher family income and never looked at OSAP…
Here are some facts for you, and I challenge you to find any publication or article on the net that publishes this:
-RESP principal withdrawals: check out lines 850 and 855 in the OSAP application on page 11, and the footnote 33 that states that RESP withdrawals for the parent, although not taxable, have to be included in the parent’s income. This will result in a reduction of OSAP benefits (some if it a non repayable grant) that could be more than 50 % of the withdrawal.. This could be more than the CESG you received for the contribution..We are talking a hidden 50% here, that compared with the 1% MER problems you have are much bigger

-RRSP of parents and OSAP: I was planning to make an RRSP contribution, when I was shocked to find out that an RRSP contribution on my side will reduce my child’s OSAP grants and loans by more than the RRSP tax refund. This is how it works: your RRSP contribution reduces your tax payable. OSAP calculates your net income by taking your gross income and deducting your CPP, EI and tax payed. The reduced tax because of the RRSP increases your net income for OSAP purposes by an equal amount.. Based on your income, your child’s OSAP is reduced by anywhere from 25 to 50 % of the income tax refund.
For most people whis results into a decrease of non-refundable grants, so it is a hidden tax.

What do you think about this convoluted patchwork of hidden rules? Show me a government publication that clearly explains this.